RIGATION  BONDS 

Facts  Regarding  Their  Issue  and  Their  Security 


By  Frederick  Lownhaupt 


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IRRIGATION  BONDS 

FACTS  REGARDING  THEIR  ISSUE  AND 
THEIR  SECURITY 


BY 

FREDERICK  LOWNHAUPT 
Author  of  “Investment  Bonds” 


BOOKLET  NO.  5 OF  A SERIES  ON  BONDS 

See  Page  2 for  other  dtlet 


MOODY’S  MAGAZINE 

NEW  YORK,  N.  Y. 


COPYillQaT,  1910,  BY  A.  W.  FxRRINo 


A SERIES  OF  BOOKLETS 
Treating  The  Subject  of  Bonds 

in  an  instructive  and  popular  manner 


Booklet  No.  l--Railroad  Bonds. 
Booklet  No.  ^--Public  Utility  Bonds. 
Booklet  No.  *3--Industrial  Bonds. 
Booklet  No.  4 Municipal  Bonds. 
Booklet  No.  S-Irrigation  Bonds. 
Booklet  No.  6--Timber  Bonds. 


PRICE  TEN  CENTS  EACH 


MOODY’S  MAGAZINE 
35  NASSAU  STREET 

NEW  YORK,  N.  Y. 


IRRIGATION  BONDS 


IRRIGATION  is  nothing  new.  It  is  just 
now,  however,  attracting  attention  since 
it  has  grown  to  a national  question.  The 
matter  of  conservation  of  our  natural  re- 
sources has  its  complement  in  the  question  of 
opening  of  new  sources  of  wealth.  There  can 
be  no  doubt  that  when  reclamation  of  much  of 
the  available  arid  land  in  the  West  is  accom- 
plished vast  wealth  will  have  been  added  to 
the  respective  states  in  which  the  transforma- 
tion has  taken  place. 


Governmental  Work. 


President  Taft  in  a recent  message  was 
strong  in  urging  on  Congress  provision  for 
vast  reclamation  projects  and  suggested  a 
large  bond  issue  to  provide  the  funds  for 
prosecution  of  the  work.  The  pressing  conges- 
tion of  population  in  the  crowded  centers  is  an 
argument  advanced  for  stimulating  the  gov- 
t ernment  to  larger  action  in  this  matter.  The 


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attractions  offered  to  settlers  by  successfully 
irrigated  land  are  by  no  means  small. 

Reclamation  is  of  national  interest,  for  the 
relations  which  it  bears  to  the  welfare  of  the 
country  aside  from  purely  commercial  con- 
siderations. Looking  forward  a few  years  it 
is  estimated  that  approximately  30,000,000 
acres  of  land  of  varying  fertility  will  be  re- 
claimed in  the  West.  On  this  land  there  will 
be  millions  of  homes. 

In  this  vast  work  the  government  will  natu- 
rally be  the  leader.  It  has  so  far  done  a large 
proportion  of  the  successful  reclamation  and 
will  undertake  large  schemes  of  a similar  na- 
ture in  the  future. 

The  burden  of  initiative  must  naturally  rest 
on  the  government  in  this  matter.  It  has  the 
lands  and  the  money  and  all  facilities  for  de- 
veloping the  projects.  But  it  should  be  kept 
in  mind  that  the  financing  of  these  government 
reclamation  projects  is  different  from  that  of 
other  projects  inasmuch  as  no  securities  have 
been  issued  by  the  government  to  prosecute 
the  work  before  now. 

Through  the  United  States  Reclamation 
Bureau  the  work  is  done,  the  settlers  to  whom 
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the  farms  are  sold  repaying  the  money  spent, 
in  installments,  and  the  amount  being  used 
again  in  further  reclamation. 

To  be  more  precise,  under  the  reclamation 
law  of  1902,  the  government  undertakes  the 
reclamation  of  public  lands,  the  money  origi- 
nally having  come  from  the  sale  of  such  lands 
in  a number  of  states.  Under  the  ‘'Homestead 
law”  settlers  may  enter,  paying  annually  to  the 
Reclamation  Fund  part  of  the  cost  of  construc- 
tion of  the  works  necessary  to  reclaim  the 
land.  The  bill  recently  passed  in  Congress  to 
authorize  $30,000,000  3 per  cent,  certificates 
for  enlarged  reclamation  work,  makes  them, 
of  course,  as  government  bonds,  to  sell  at  a 
low  rate  of  interest  and  not  irrigation  bonds  in 
the  usually  accepted  sense  of  that  term.  'Fheir 
safety  is  in  no  wise  dependent  on  the  success 
of  the  project  or  projects  carried  on. 

So  then  it  will  be  seen  that  the  irrigation  or 
reclamation  work  conducted  by  the  govern- 
ment is  nothing  other  than  a departmental 
activity  of  a special  character,  and  is  distinct 
from  the  private  enterprises  of  a similar 
character.  There  are  around  thirty  projects 
that  have  been  undertaken  by  the  Reclamation 
5 


Bureau,  a number  of  which  were  opened  in 

1908. 

Various  Methods. 

Aside  from  the  purely  governmental  activi- 
ties in  this  direction,  irrigation  is  being  pro- 
moted by  various  methods.  In  numerous 
places  where  there  is  irrigable  land,  or  land 
that  gives  promise  of  fertility  under  cultiva- 
tion, means  and  capital  are  being  sought  to 
bring  in  the  water  and  make  the  desert  blos- 
som and  bear  fruit. 

A close  analysis  of  the  hundreds  of  details 
that  cling  about  all  the  schemes  for  developing 
irrigation  districts  is  impossible  without  mak- 
ing a long  story.  It  is  sufficient  as  a working 
basis  to  mention  here  the  salient  features  of 
the  different  methods  which  are  being  present- 
ed for  the  consideration  of  investors.  Each 
one  has  its  own  peculiar  aspects,  and  each 
should  be  studied  by  an  investor  in  much  the 
same  way  as  he  would  go  into  all  the  ques- 
tions regarding  railroad,  public  service  or  any 
other  securities. 

Municipal  Districts. 

Prominent  among  the  different  kinds  of  ir- 
rigation securities  are  those  put  out  by  muni- 
6 


cipal  irrigation  districts. 

■ In  various  states  of  the  West  legislation 
from  time  to  time  has  put  upon  the  statute 
books  laws  permitting  the  formation  of  so- 
called  irrigation  districts.  In  the  states  where 
these  laws  are  now  found,  there  are  sections  of 
country  of  great  promise,  when  scientifically 
watered.  In  some  of  these  sections  there  is 
more  or  less  development  of  agriculture  before 
any  systematic  attempt  at  irrigation  is  made, 
and  there  are  permanent  settlers  in  numbers 
varying  with  the  attractiveness  of  the  location. 

Irrigation  Laws  Developing. 

Under  the  law  these  settlers,  in  a specified 
amount  of  territory,  may  constitute  an  irriga- 
tion district.  The  legal  provisions  for  this 
kind  of  a quasi-municipality  are  not  at  all  uni- 
form throughout  the  different  states.  Although 
irrigation  is  not  new  to  the  West,  it  is  only 
within  recent  years  that  its  far-reaching  eco- 
nomic importance  has  been  fully  appreciated. 
For  this  reason  the  statutory  provisions  gov- 
erning the  matter,  like  the  laws  affecting  any 
movement  not  yet  in  its  full  development,  are 
yet  in  the  evolutionary  process.  The  states  are 
learning  from  each  other  rapidly  just  how  to 
7 


frame  laws  suited  to  the  exigencies  arising, 
and  to  the  greatest  stability  and  development 
of  the  enterprise. 

Formation  of  Irrigation  Districts. 

These  irrigation  districts  may  embrace  parts 
of  several  counties  or  they  may  be  composed 
almost  entirely  of  individual  counties.  This  is,  f. 
of  course,  a matter  entirely  dependent  on  phy- 
sical conditions.  In  practically  all  cases  the 
proposition  to  incur  indebtedness  for  the  pro-  f 
motion  of  irrigation  for  the  district  must  be 
approved  by  a majority  of  the  resident  tax- 
payers; and,  of  course,  the  idea  is  to  build  and 
own  completely  the  water  system.  The  dis- 
trict is  formed,  its  officers  elected,  the  indebt- 
edness voted.  These  proceedings  are  approved 
and  affirmed  by  the  principal  district  court 
within  the  irrigation  district.  Once  the  bonds 
are  issued  they  become  a first  lien  on  the  dis- 
trict. Payment  of  interest  and  principal  is  a 
matter  of  tax  levy  along  with  all  other  taxes, 
and  in  general  practice  is  fixed  by  county  com- 
missioners and  collected  by  the  County  Treas- 
urer of  the  county  in  which  the  irrigation  dis- 
trict office  is  located.  The  tax  levy  is  usually 
in  excess  of  actual  requirements. 

8 ^ 


So  much  for  the  formation  and  general  con- 
duct of  these  municipal  corporations.  The 
process  is  comparatively  simple. 

“Carey  Act”  Securities. 

The  other  well-known  and  widely  adver- 
tised^ method  of  irrigating  in  the  West  and  one 
i which  is  producing  large  amounts  of  securities, 
which  are  now  being  presented  to  the  invest- 
ment market,  is  that  carried  on  under  the  so- 
t called  “Carey  Act.”  This  Federal  statute  was 
originally  passed  in  1894,  and  has  been  modi- 
fied from  time  to  time  to  meet  conditions. 

Under  its  provisions  there  is  set  aside  from 
out  of  the  public  desert  lands  a section  deemed 
suitable  for  irrigation  and  development.  The 
Secretary  of  the  Interior,  with  the  approval  of 
the  President,  grants  these  lands,  not  to  ex- 
ceed 1,000,000  acres  for  each  state.  Before  an 
application  of  a state  is  allowed  it  must  file 
maps  of  the  lands  and  show  the  plans  for  do- 
ing the  work  of  contemplated  irrigation  with 
the  Secretary  of  the  Interior.  Subject  to  the 
proper  examination  and  such  regulations  as  he 
\ may  prescribe  the  land  is  allotted ; and  as  fast 
as  a state  furnishes  satisfactory  proof  that  all 
requirements  have  been  complied  with  the 
i 9 

4 


government  releases  the  land  absolutely. 

But  the  process  works  out  in  about  this  way : 
Private  corporations  apply  for  a certain 
amount  of  land  and  the  adequate  amount  of 
water  from  some  stream  or  streams,  and  after 
giving  the  preliminary  engineering  attention 
present  their  plans  to  a State  Board  of  Land 
Commissioners,  which,  in  turn,  gives  them  en- 
gineering examination.  If  they  be  regarded 
feasible  the  State  Board  turns  them  over  to  the 
government  for  further  examination.  If  sat- 
isfactory to  it  the  state  may  go  ahead  and 
grant  the  request  of  the  promoters. 

The  project  is  then  developed  under  the 
supervision  of  the  state’s  engineer,  who  is  to 
see  to  it  that  the  company  which  is  under  bond 
to  do  so  fulfills  its  contract  and  carries  out  the 
plan  as  presented. 

Until  the  government  and  state  pass  favor- 
ably on  all  matters  there  is,  of  course,  no  set- 
tlement of  the  land.  But  as  soon  as  the  tract 
is  opened  parcels  of  land  up  to  160  acres, 
which  is  the  maximum  permitted  by  law,  may 
be  applied  for.  In  this  way  the  settlement  pro- 
gresses until  all  the  available  acreage  is  taken 
up. 


The  corporation  attends  to  the  construction 
work  and  turns  in  the  water.  The  land  is  sold 
to  settlers  at  a certain  price  per  acre  as  soon 
as  the  tract  is  opened  and  is  generally  paid 
for  in  instalments.  A form  of  mortgage  is 
given  and  against  a number  of  these  mort- 
gages, which  are  deposited  with  a trustee  in 
addition  to  a first  lien  against  the  construction 
works,  the  bonds  are  issued.  This  is  always 
done  in  the  best  practice.  He  must  establish 
his  residence  within  six  months  after  water  is 
turned  into  his  land  by  living  upon  it  at  least 
thirty  days,  after  which  he  may  take  title  until 
three  years  after  entering.  Naturally  the  price 
of  land  or  water  rights  varies  with  conditions. 
In  many  cases  it  is  around  $35  or  $40  per  acre. 

Private  Corporations. 

A fourth  type  of  irrigation  promotion  is  that 
purely  and  simply  private.  That  is  to  say,  a 
section  of  land  is  selected,  a company  formed, 
and  any  method  they  may  choose  to  adopt  used 
to  raise  money.  They  may  build  the  irrigation 
works  and  then  with  a completed  plant  and 
water  flowing  go  ahead  and  sell  the  land  to  re- 
imburse themselves.  Or  they  may , issue  se- 
, curities  to  get  the  money  to  construct , the 
11 


works  and  then  depend  on  selling  the  land  to 
pay  off  the  securities.  Under  these  latter  cir- 
cumstances, of  course,  the  general  investment 
market  would  be  called  upon. 

Investment  Considerations. 

Everybody  interested  in  irrigation  securities 
should  keep  in  mind  these  four  different  meth- 
ods which  are  being  pursued  in  the  enterprise. 

From  an  investment  point  of  view  all  of  the 
three  last  mentioned  ways  through  which  capi- 
tal may  be  embarked  in  the  enterprise  must 
have  some  general  and  specific  consideration. 
Four  things  together  make  the  irrigation  pro- 
ject: the  land,  the  water,  the  settler  and  the 
water  works. 

Out  of  all  of  these  grow  a lot  of  questions 
which  must  be  satisfactorily  answered  before 
the  irrigation  project  may  be  deemed  the  basis 
of  a secure  investment.  They  come  under  the 
heads  of  physical,  legal,  political  and  financial. 
To  know  the  status  of  an  irrigation  project 
and  the  securities  on  it  from  these  sides  looks 
like  a formidable  task;  and  so  it  is  for  an  in- 
vestor, if  left  to  his  own  resources.  But  there 
are  some  very  reputable  banking  houses  inter- 
ested in  this  class  of  securities,  whose  financial 
12 


resources  and  facilities  are  sufficient  to  enable 
them  to  scrutinize  and  investigate  all  such 
projects  and  sort  out  the  good  from  the  bad, 
Their  experience  has  shown  them  that  all  this 
care  is  necessary. 

Now  in  considering  the  physical  aspects  of 
the  question  it  will  be  recognized  that  the  en^ 
gineer  plays  an  important  part.  So  at  the  out- 
set he  must  be  thoroughly  competent  and  trust- 
worthy. There  are  some  engineers  whose 
standing  and  success  in  this  work  makes  their 
examination  a definite  basis  for  conclusions, 
and  they  are  sought  by  the  high  class  invest- 
ment dealers.  The  questions,  therefore,  who 
are  the  engineers?  and  what  do  they  report? 
begins  the  inquiry. 

What  they  must  consider  is  the  character  of 
the  soil,  the  climatic  conditions  existing,  the 
water  supply — its  adequacy,  its  source,  its 
flow,  its  continuance,  etc.  In  connection  with 
this  matter  of  water  supply  some  very  im- 
portant things  have  to  be  settled.  One  of  the 
most  fruitful  sources  of  failure  and  trouble  in 
the  past  has  been  the  all  important  question  of 
water  rights.  The  right  to  take  water  and  the 
quantity  taken  must  be  established  beyond  a 
13 


peradventure.  Western  states  vary  consider- 
ably in  their  law's  affecting  water  rights.  There 
must  not  be  room  for  a doubt  about  this  mat- 
ter, for  without  the  proper  amount  of  water 
the  whole  scheme  collapses.  It  is  a compli- 
cated question  every  time,  no  matter  what  the 
form  of  project. 

Not  only  in  connection  with  water  rights, 
but  wdth  other  matters,  especially  in  municipal 
irrigation  districts,  legal  points  must  be  set- 
tled. The  same  caution  that  asks  the  best  legal 
opinion  of  the  validity  of  straight  municipal 
bonds  should  be  exercised  here. 

As  to  how  political  considerations  may  enter 
into  the  matter,  it  should  be  remembered  that 
the  statutes  of  the  states  differ  and  that  what- 
ever laws  are  framed  should  be  with  the  best 
interests  of  the  state  in  mind  and  without  spe- 
cial reference  to  any  particular  locality  or 
group  of  promoters.  To  get  the  best  results, 
all  appointments  and  examinations  should  be 
free  from  political  influences.  Where  a bank- 
ing house  of  standing  goes  over  all  proceed- 
ings and  its  attorneys  pass  on  the  project  there 
is  all  likelihood  that  anything  that  looks  like 
politics  will  be  discovered. 

14 


When  questions  such  as  have  been  suggest- 
ed are  satisfactorily  disposed  of,  the  general 
success  of  the  particular  project  must  be  re- 
garded. As  we  have  said,  the  settler  must 
come  into  the  land  or  be  there  in  sufficient 
^ numbers  to  justify  the  undertaking  and  make 
its  future  assured.  In  the  municipal  district  he 

# is  already  there ; in  the  government,  Carey  Act 
I and  purely  private  projects  he  must  be  drawn 

in.  In  the  municipal  district  the  coming  of  ad- 
ditional water  must  mean  increased  fertility, 
for  the  settler  must  meet  additional  taxes.  The 
value  of  the  land  in  its  ability  to  produce  must 
increase  to  make  the  bonds  which  are  a mort- 
gage on  the  land  secure.  Many  of  the  ques- 
tions about  straight  municipal  bonds  apply  to 
these  quasi-municipal  irrigation  bonds. 

In  the  case  of  the  Carey  Act  bonds  it  is  well 
to  know  that  settlement  is  made  or  progress- 
ing by  those  who  will  stay  on  their  farms  and 
not  take  land  for  mere  speculation.  It  is  well 
to  know  how  many  there  are  there  and  to  what 
stage  successful  agriculture  has  progressed.  It 
is,  of  course,  understood  that  bonds  are  issued 
on  the  mortgages  which  the  settlers  give, 
j There  should  not  be  too  narrow  a margin  be- 

15 

# 


tween  the  amount  of  these  mortgages  and  the 
amount  of  the  bonds  issued  against  them.  It 
is  best  that  the  mortgage  on  the  construction 
works  should  be  on  a completed  property.  An- 
other matter  that  is  very  vital  to  the  success  of 
an  irrigation  project  is  that  of  transportation* 
Be  the  enterprise  ever  so  good,  if  there  are  not 
adequate  railroad  facilities  its  position  is  ob- 
vious. 

All  these  things  and  others  growing  out  of 
them  go  to  make  the  safety  or  weakness  of 
irrigation  securities.  Their  security,  in  the 
final  analysis,  is  dependent  upon  the  outcome 
of  the  enterprise.  Just  as  investors  have  come 
to  that  point  where  their  confidence  rests 
largely  in  their  bankers  in  the  selection  of  mu- 
nicipal, railroad,  public  service,  industrial  or 
other  bonds.  So  they  should  look  to  them  in 
this  instance  where  they  themselves  have  not 
the  facilities  or  knowledge  to  enable  them  to 
discriminate.  The  banker  valuing,  of  course, 
reputation  and  clientele,  exercises  the  utmost 
care  before  he  offers  securities  of  this  or  any 
other  kind  to  his  customers. 


I 

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